Cost Of Capital

Cost of capital is described as the opportunity cost of a specific investment. Cost of capital includes the cost of equity and cost of debt. It is the rate of return that a company is capable of earning at the equivalent level of risk as to the chosen investment. In other words, the cost of capital is an expected return that the capital supplier contrives to earn on his investment.

Economic Value Added (EVA)

It is an entity’s monetary value at the end of a specific time period subtracted from the value of that entity at the beginning of that particular time period. In the case of companies, it is after-tax earnings subtracted from the opportunity cost of capital. EVA measures the change of a company’s worth in a particular time period.

Capital Rationing

It is described as constraining a particular company’s new investments. This is done by utilizing either a higher capital cost when counting possible investments or adjusting a limit on portions of the capital budget. Capital rationing is generally done in case of companies which have not done well from investments in the recent past. This phenomenon may also occur if a company possess superfluous production capacity on hand.

Opportunity Cost

It is the cost of an alternative that is required to be relinquished so that a particular course of action is taken. Opportunity cost is also described as the deviation in return between the preferred investment and the one that is ignored. The uncertain outcome of such a choice constitutes the risk.

Risk

It is described as the chance that the actual return of an investment will vary than what is expected. The risk may include the possibility of losing all or part of an investment. It is generally believed that higher the risk, greater the return from a particular investment

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